US banking system measures were mixed last week, allowing the composite macroliquidity index to inch to a new high. The Treasury market continues to act as a black hole absorbing all of that liquidity at the expense of stocks and commodities. The effect of Bernanke's Jackson Hole smoke signal wore off quickly, at least in terms of beneficial impact on stock prices.

There are those who speculate that the market is bidding up bond prices in the expectation that the Fed will do the Twist and start selling short term paper from its portfolio and replacing it with long term paper. I suspect that the rally in Treasuries is strictly a matter of the fear trade driving funds out of the Eurobanks and into Treasuries. Flows into US bank accounts actually slowed in the last reported week.

The market is looking forward to another Fed rescue on September 21. The scuttlebutt is that the Fed will do what they are calling "Operation Twist," which will have as much impact on the market as the dance invented by Chubby Checker in the 1960s, leaving market participants twisting the nights away in the wind.

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Doing the Twist, as the supposedly plugged in sources describe it, the Fed would sell its shorter term Treasuries back to the Primary Dealers and buy an equal amount of longer term Treasuries from them. I guess the theory is that by pushing longer term rates even lower than they are now, this will magically transform the US economy into a growth dynamo. They apparently haven't noticed that long term rates have been collapsing and that this has been accompanied by a weakening economy. They also haven't noticed that Japan has tried variations of this theme for 15-16 years. Lots of good it did them.

This is in no way a quantitative easing if the Fed simply holds its balance sheet flat. It would still be a net negative for the markets without actual SOMA expansion. It's a mean, stupid, and futile gesture (with apologies to Animal House) for an economy locked in a liquidity trap, and it could be a net negative for the banking system if it were successful in reducing long term yields (which I doubt it would be.)

Meanwhile the latest data shows US banks selling Treasuries again. Bond funds also showed outflows in August reversing a lengthy period of heavy net inflows. And foreign central banks are again pulling in their horns. The last phase of the Treasury buying panic appears to be resting on the shoulders of the Primary Dealers, whose track record is abominable on Treasuries, and on non-official foreign buyers. If money flowing into the US slows even a little, there won't be enough to keep both stocks and Treasury prices stable.